Fed’s Turn at the Podium: Minutes Due Later as Prices Tick Up, Housing Impresses

The Fed is in focus today as minutes from January come out later and several speakers take to the podium. Meanwhile, stocks have a stronger tone early, and both housing data and producer prices surprised to the upside.

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Key Takeaways

  • Fed in focus as minutes due later and five speakers make remarks

  • Late strength on Tuesday could be carrying over into Wednesday’s early action

  • Housing starts impressed in January, but producer prices rose more than expected

(Wednesday Market Open) The Fed might steal the show today with minutes from its last meeting and a host of speakers approaching podiums. Otherwise, focus remains on coronavirus, but stocks ticked higher in pre-market trading after yesterday’s nice late comeback.

Five Fed officials deliver remarks Wednesday at separate events. Some things to consider listening for—besides any interest rate or balance sheet observations—include their thoughts on how coronavirus might affect the economy, the impact of the virus on China, the latest inflation data, and how U.S. economic growth is shaping up.

If you check what analysts have been saying, Q1 gross domestic product (GDP) might be below 2%. The futures market is building in higher chances of a Fed rate cut in the coming months, maybe in part because of the virus and its impact (see more below). Fed minutes are due this afternoon and could give some insight into recent thinking on Constitution Avenue back when the Federal Open Market Committee (FOMC) left rates unchanged last month.

Major overseas indices mostly rose earlier today, with the exception of stocks in Shanghai where the fear meters remain at high volume. Gold traded near seven-year highs above $1,600 an ounce this morning, but bonds moved a little lower.

There’s also a little data in the mix this morning as U.S. January housing starts enjoyed another big month after December’s huge rise. The number of starts hit a seasonally-adjusted 1.567 million in January, which easily beat analysts’ consensus for 1.425 million.

That looked like positive news, but producer prices for January could be a bit more complex to figure out. A rise of 0.5% was way above the average estimate of 0.1% and the biggest gain in more than a year. Is this a one-month spike or is it something that’s going to last? A little inflation can be good if it means demand for wholesale products is on the rise. It’s not so good if it means producers face mounting costs that will either get passed along to the consumer or internalized and potentially pressure margins. Anyway, it might be interesting to hear what, if anything, Fed speakers have to say about it today. 

Late Lift

Considering where things started out yesterday, the finish didn’t look all that bad. Major indices lost ground except for the Nasdaq (COMP), but it could have been much worse. 

When Apple (AAPL) and Walmart (WMT)—two of the world’s biggest and most widely-held companies—both announced bad news within the same 24 hours, it wasn’t too surprising to see things head south on Wall Street. However, seeing indices finish Tuesday well off their lows suggests that market resilience continues to be the main story.

Some would argue the coronavirus is the main story, and that’s arguably true for now. However, governments appear to be doing a good job maintaining a quarantine of victims of the illness, and it’s still possible this could be a short, one-quarter blip on the financial market radar. That’s not to discount the unfortunate human toll, but only to say we might be back here in a few months with different things in focus.

AAPL’s decline yesterday didn’t turn out to be too dramatic. It fell less than 2% after being down more than 3.5% at the start of the day. The news was bad, but not devastating by any stretch of the imagination, and investors seemed to quickly realize that. 

One sign of investors’ faith in the tech sector might have been gains by Microsoft (MSFT) and Amazon (AMZN), while FAANGs in general also stayed firm on Tuesday in spite of AAPL’s woes. As one analyst noted to Bloomberg, these companies used to rise and fall together, but not so much yesterday.

Seeing WMT recover and post gains despite reporting a soft holiday season also could tell you something about investor enthusiasm right now.

Even if AAPL fell 5% right now, that would take it back to … wait for it … Feb. 3. You could even make the case that AAPL and maybe the entire market might benefit now from, say, a 5% pullback that might clear the waters a bit. 

That’s not to say it’s going to happen, only that it wouldn’t necessarily be a disaster if it did. A lot of people might actually welcome that kind of short, fast downturn after the 14 months we’ve just had. That would truly be a test of investor resilience. For that matter, the recent 3.5% dip in late January and early February didn’t last too long.

Puzzle Pieces Not Fitting

At this point, relationships in the market look really out of whack, to use a scientific term. Both stocks and bonds are in the stratosphere, and the Cboe Volatility Index (VIX) can’t hold 15. Meanwhile, gold remains elevated but industrial metal copper is near one-year lows. Crude managed to claw back from early weakness to finish around $52 a barrel, but remains near recent 13-month lows. 

With bonds and stocks, it comes down to money being quite inexpensive by historical standards. Something is likely to give here, but not necessarily stocks.

What might be a bit worrisome is the enthusiasm that’s so overwhelming right now. On Monday, when news came out that AAPL expected to miss its quarterly revenue guidance due in part to coronavirus, several articles quickly appeared in the media quoting analysts who suggested buying any dip in the stock. That tends to raise eyebrows when you hear people say that so quickly.

As investors, it’s important to take time to assess the situation carefully and not make split-second decisions one way or the other. The market is likely to separate the wheat from the chaff over time, and there’s no rush to jump in or out on positive or negative news stories.

One thing people might want to look for is whether AAPL continues to drag some other Information Technology stocks, as it appeared to on Tuesday. Some of the stocks that might have been down in sympathy included Intel (INTC), Qualcomm (QCOM), and Broadcom (AVGO). 

It might also be interesting to hear what some of the chip companies have to say about the virus situation and how or whether it affects their revenue. A bunch of chip firms recently dished out some pretty positive forecasts. Do they think the virus is going to derail that? 

It looks like some investors started the week putting their money as far away from the coronavirus as possible. The Utilities sector leapt to new all-time highs Tuesday, and that happens to be the only sector where the word “coronavirus” hasn’t been mentioned in a single earnings call this season as of the end of last week, according to research firm FactSet. Utilities outpaced every other sector for the session. 

Tesla (TSLA) managed to keep the ball rolling yesterday as it rose 7% after a positive analyst note. But the Financial sector was the dog of the day after part of the yield curve again went inverted. Three-month Treasury yields finished the day about a basis point above the 10-year yield, usually a sign of caution among investors and potentially rough news for bank balance sheets. However, for what it’s worth, the 10-year yield still hasn’t really tested last summer’s lows, and remains above 1.55%. That’s faint praise, though, when you consider it tested 1.95% not too long ago.

So what catalysts remain this week that might come into play? It’s actually a bit quiet. We’re getting into retail earnings season, but many of the big names don’t report until next week. Deere (DE) earnings this Friday could be worth a look as the Industrial sector has been kind of a laggard lately despite trade tensions relaxing. Fed minutes this afternoon and existing home sales Friday morning also might help give some new direction. Or not.

CHART OF THE DAY: ELECTRIC OUTSHINES GAS: This three-month chart of Tesla (TSLA-candlestick) vs. Exxon Mobil (XOM-purple line) shows what a charge investors have put into the electric car maker’s shares lately even as many plug the well on one of the world’s biggest energy companies. Data sources:  Nasdaq, NYSE.  Chart source: The thinkorswim® platform from TD AmeritradeFor illustrative purposes only. Past performance does not guarantee future results.

Grow the Pie, Slice the Pie: If sector growth is about making the pie bigger, competition between its component companies is about how that pie is sliced up. That's important to keep in mind as we look at the semiconductor industry over the past year—and particularly over the past week. Since the start of 2019 the Philadelphia Semiconductor Index (SOX) has risen about 70%, and 5% last week alone. Though semiconductors took a step back on Friday, one of its major components, Nvidia (NVDA) rose 7% to new highs on solid earnings, particularly in its data center unit. Cloud services, gaming, and the rise of cryptocurrencies and blockchain technology are among the "grow-the-pie" narratives driving SOX over the last few years. But if and when the sector were to level off, it might be time to assess how that pie is sliced up. NVDA's showing on Friday may have served as a reminder.

When the Facts Change? A leading economist (either John Maynard Keynes or Paul Samuelson, depending on whom you ask) said in response to a flip-flop accusation, "When the facts change, I change my mind. What do you do, sir?" According to interest rate expectations priced into CME Fed Funds Futures, the market has changed its mind over the past month, and is now pricing in a much higher probability of one or more rate cuts between now and the end of the year. As of this morning, the futures markets are pricing in about a 50/50 chance that the Fed will hold the line on interest rates between now and June, whereas a month ago it was widely expected there would be no rate cut in the first half of the year. In fact, there was a 12% chance then that the Fed would actually hike rates.

Looking ahead to December, the change is more acute. A month ago there was about a 40% chance that by the end of the year, the Fed funds target would be right where it is now—between 1.5% and 1.75%—and about a 6% chance that it would be higher. Now, however, there’s a mere 16% chance that there will be no change by the end of the year, and zero chance of a hike. And there’s a 50% chance we’ll see two or more cuts. The change could be a reflection of the emerging economic impact of coronavirus on the world economy, or there could be other forces at work. Either way, it’s a metric worth watching.        

“Green Generation” Embracing Big Oil? Young investors bucked the trend in January by net-selling TSLA and net-buying Exxon Mobil (XOM). That was per the Investor Movement Index® ($IMX)—TD Ameritrade’s proprietary, behavior-based index, aggregating Main Street investor positions and activity.

Though it might seem weird to think of millennials getting bullish on big oil, it’s possible some were attracted by XOM’s yield of more than 5%. However, people seeking yield shouldn’t assume it will remain in place. Some analysts are getting a little nervous about high yields in the Energy sector, and not just at XOM. Low crude and natural gas prices, high debt at some companies, and the  inability of some firms to grow crude production all could play into the dividend picture ahead. That’s not to say anyone’s about to slash dividends, but investors should remember that when the going gets tough, dividends often come under a microscope in the finance department. One thing to watch for is any company that’s tapping into debt to maintain dividend payments—a potential negative sign that cash flow may be trickling. For instance, Barron’s noted that as of early this year, XOM’s cash flow didn’t cover its dividend and buyback program.

Good Trading,

JJ

@TDAJJKinahan

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This week's economic calendar. Source: Briefing.com
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Key Takeaways

  • Fed in focus as minutes due later and five speakers make remarks

  • Late strength on Tuesday could be carrying over into Wednesday’s early action

  • Housing starts impressed in January, but producer prices rose more than expected

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